Arroyo Center RAND 1 RAND Arroyo Review of Army Arsenals and Ammunition Plants May 2004 Mike Hix

Arroyo Center RAND 2 Scope of Study; 14 Government-Owned Ammunition Plants and 2 Arsenals Watervliet Pine Bluff Rock Island Crane McAlester Scranton Riverbank Louisiana Lake CityRadford Lone Star Mississippi Kansas Milan Holston Iowa GOGO FACILITIES CONTRACTORS GOCO PLANTS Cannons & Mounts Ammunition Chamberlain Norris Valentec Alliant Tech Day & Zimmerman MTI Am Ord General Dynamics British Aerospace BAE OS

Arroyo Center RAND 3 Problems in the Ordnance Base (1) l Lack of a strategic vision –Ideas, draft plans, reorganizations –But no approved, stable vision and plan for achieving it l Army ownership of peripheral function creates management distraction for Army leadership –Manufacturing not a core Army function; commercial activity, 10 USC 2501, 2535 –Peripheral function even in logistics community l Reduced workload, over-capacity, high costs--prominent in arsenals –Reducing equipment, space, and personnel helps, but insufficient

Arroyo Center RAND 4 Steep Decline in Manufacturing and Resulting Idle Capacity Precipitated Request for Study Watervliet Arsenal peak production % 30% 97% 47%

Arroyo Center RAND 5 l Capital investment doesn’t compete well in Army operating budget –Leads to old and inefficient equipment and practices--particularly in ammo plants –Contractors lack incentives to modernize Army equipment l Ammunition has a low funding priority –Variable buys from year to year –Inefficient order quantities –Low investment in manufacturing technology and methods –Under-funding of war reserves leads to strategy change by default: from replenishment to surge l Ammunition replenishment policy in flux –No DoD guidance –No Army proponent (for equipment, missiles or conventional ammo) –No published Army policy Problems in the Ordnance Base (2)

Arroyo Center RAND 6 Problems and Guidance Suggest a Vision, Or Policy Objective, for the Base A responsive, innovative, efficient manufacturing base capable of meeting national security requirements while relying to the maximum practical extent on the inherent advantages of competition and private ownership of capital Maximum practical extent is defined by four criteria: Inherently governmental functions National security requirements Private sector willingness to provide Cost

Arroyo Center RAND 7 Conceptual Framework for Assessment Is this capability critical to the Army’s needs? Should the government own this mission-critical capability? No Divest Yes Is the function inherently governmental? Is there a national security reason for government ownership? Is it impossible to interest the private sector in providing the capability? Can the government provide the capability at lower long-run cost? Mission Critical Yes to any Some form of government ownership No to all Divest

Arroyo Center RAND 8 Options For Advancing the Vision PRIVATIZE l Sell plants as going concerns, with ammunition contract l Require buyer to maintain capability for set period l Trade sale revenue for conduct of remediation and breaks on ammo prices CREATE A FEDERAL GOVERNMENT CORPORATION l Transfer plants to FGC as going concerns l Charter: Meet DoD require- ments & sell commercial goods CONSOLIDATE l Merge manufacturing onto fewer plants l Declare unneeded plants excess RECAPITALIZE ON MULTI-FUNCTIONAL POSTS l Close all plants as part of broad BRAC strategy l Recapitalize on enduring installations

Arroyo Center RAND 9 BENEFIT PRIVAT. FGC CONSOL. Divests Government Divests Army Houses mfg with core competency Removes Army leadership distraction Improves access to capital Strengthens incentives for investment Enhances commercial use of assets Increases likelihood of revenue from sale Avoids budget costs of consolidation Avoids front-loaded remediation Reduces overhead Avoids political issues of transfer of work Can meet mission requirements Privatization and FGC Offer Benefits Consolidation Lacks √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ COST COMPLIANCE EXTERNAL MANAGERIAL √ √ √ MISSION √ √

Arroyo Center RAND 10 Recommended Objective End States l 11 GOCO plants –Privatize sequentially to limit risk; package plants to improve value; keep plants whose sale would increase costs –Exclude Mississippi--NASA-owned –Fallbacks: 1) long-term land lease and divestiture of equipment; 2) consolidate l 3 GOGO plants –Continue current ownership: Other activities occur at these plants (depot, demil) Protective legislation on Crane and McAlester Crane--Navy-owned Provides government-owned land hedge (55% of existing acreage) l 2 arsenals –Convert to federal government corporation Assess performance, could be end state or transition to private –Fallbacks: 1) Seek special legislation to privatize; 2) Consolidate during BRAC; or 3) Convert to GOCO through A-76

Arroyo Center RAND 11 Expected Benefits of Recommendations l Creates and implements a vision l Eliminates for Army leadership the distraction of peripheral function--management of factories l Transfers production assets to organizations whose core function is manufacturing l Consistent with national policy l Reduces Army costs –Generates revenue from sale: apply to environmental remediation or reduce prices –Incentivizes and enables modernization--enhances productivity –Fosters competition –Enhances property development –Reduces government staff l Stimulates competition for more efficient replenishment means l Maintains or increases employment at all locations l Does not require BRAC authority l Avoids front-end cost of consolidations

Arroyo Center RAND 12 Substantial Uncertainty Surrounds Savings Estimates Arsenals PRESENT VALUE OF SEVEN-YEAR SAVINGS TO ARMY ($ MILLIONS) 6 plants 3 Ammo plants Arsenals ASSUMPTIONS VARIED Sale revenue (DCF, Multiple of sales) Ammunition prices ARMS benefits Contract termination costs Gov’t employee termination costs Discount rate Ammunition PlantsArsenals

Arroyo Center RAND 13 Recommended Process l Adopt broad policy: –Adopt a vision that dictates maximum practical private-sector reliance (where criteria are met), with target date of FY07 –Create FGC for Watervliet and Rock Island l Assign responsibility to develop and execute plan –Fix responsibilities: ASA(ALT) lead, with ASA(I&E), AMC, and now PEO(Ammo) –Establish timelines –Establish progress reporting l Specific actions –Build GSA/Army team –Begin proper environmental characterization of facilities –Conduct any further required assessment of ongoing initiatives, market analysis, and requirements –Contract for outside implementation assistance (investment banker, technology, legal) –Draft FGC charter –Lay groundwork for full Army commitment to policy objective

Arroyo Center RAND 14 BACK-UP SLIDES

Arroyo Center RAND 15 l Army declares intent to exit the ammunition manufacturing business l Army arranges industry days, initiates RFIs to gain info on market l Army declares property excess-to-ownership, but not excess-to-need –Restricts sale to buyers who can maintain manufacturing capability –Like use permits transfer of property during remediation l GSA solicits offers –May either begin with negotiated sale to current operator (PRP) or competitive sale (ETA) among ammunition manufacturers, partnerships –Buyer agrees to maintain capability for set period; Army agrees to ammo buys l Bidders respond with: –Offering price for plant (divestiture action) –Ammunition prices (procurement action) l Army/GSA team may accept most favorable offer (if it provides fair market value), or reject all offers –House oversight committee must approve A decision to market a plant carries little cost risk If best offer leaves Army worse off, Army/GSA team rejects it Ammunition Plants: Steps in the Sale Process

Arroyo Center RAND 16 What Might A FGC or GSE Look Like? Name: U.S. Ordnance Corporation (USOC) Charter: – Maintain capacity to meet U.S. DOD requirements for ordnance materiel (peacetime and replenishment) – Provide ordnance-related materiel to U.S. DOD and, as authorized, to foreign nations – Manufacture and sell non-ordnance products as capable – Generate revenues that equal costs Management: Board of directors appointed by President, with advice of Senate CEO: Manufacturing executive Personnel: USOC employees, not civil service Tax status: Exempt Budget: Independent of Federal budget

Arroyo Center RAND 17 USOC Structure USOC Watervliet DivisionRock Island Division Rock Island Manufacturing Rock Island Real Estate Holdings Manufacturing Sciences Metal Products Composite Products Watervliet Manufacturing Watervliet Real Estate Holdings Commercial Residential Recreational Metal Products Composite Products Commercial Residential Recreational